£20,000 invested in BAE Systems shares 4 years ago is now worth…
£20,000 invested in BAE Systems (LSE: BA) shares on 24 February 2022 â the day Russia invaded Ukraine â would now be worth around £80,668, with dividends included.
The surge in global defence spending since that moment has driven one of the most sustained reâratings anywhere in the FTSE 100. It has pushed BAEâs order book, earnings visibility and cash generation to record levels.
But NATO members have now pledged to lift combined defence budgets to 5% of GDP by 2035, up from around 2% last year. It is an increase worth roughly $423bn (£314bn) a year across nonâUS members alone. And as Europeâs largest defence contractor and the worldâs sixthâlargest, BAE sits at the centre of this shift.
So is now the time for me to add to my holding in BAE?
Whereâs the value going to come from?
Over the long run, earnings growth creates real shareholder value, not shortâterm market swings. And the companies that can expand revenues, margins and cash flow consistently are the ones whose share prices tend to benefit most.
A risk to BAE is any delay on major longâcycle defence programmes, which can squeeze margins and slow cash conversion. Another is a fault in a key product line, which could be expensive to remedy and potentially damage the firmâs reputation.
That said, consensus analystsâ forecasts are that BAEâs earnings will grow an average 12% a year over the medium term. This looks well supported by its recently-released 2025 results. These showed underlying earnings before interest and taxes (EBIT) rise 12% year on year to £3.3bn, while sales increased 10% to £30.7bn.
Free cash flow stayed strong at £2.16bn, despite higher R&D investment, while order intake of £36.8bn drove the backlog to a record £83.6bn. This reflected robust demand across air, maritime, electronic systems and US platforms.
Management forecasts increases this year of 9%-11% in EBIT and 7%-9% in sales. Free cash flow is projected at over £1.3bn.
Are the shares still undervalued right now?
For a business like BAE, forwardâlooking relative measures matter far more than backwardâlooking ones. This is because defence spending, order visibility and margin guidance all shape future earnings in a way past valuations simply cannot capture.
On the key forward price-to-earnings ratio, the firmâs 28.8 is bottom of its competitor group, which averages 32.4. These firms comprise L3Harris Technologies at 30.4, Rolls-Royce at 31.1, TransDigm at 32.7, and RTX at 35.2.
So despite its huge share price gains since 2022, BAE is still undervalued on this measure.
It is even more pronounced in its forward price-to-sales ratio of 2 against its peersâ average of 4.1. And it also looks a bargain at a price-to-book ratio of 5.7 compared to the 14.3 average of its competitors.
Taken together, these relative measures suggest that even after its powerful multiâyear rally, BAE still trades at a meaningful discount to its global peers.
My investment view
Despite the multiâyear rally in the share price, the stock still looks materially cheaper than comparable defence majors. And with earnings and cash flow now underpinned by multiâyear government commitments, the outlook remains strong.
That is exactly the kind of set-up I look for, so I will add to my holding very shortly. In the meantime, other undervalued high-growth stocks have also caught my eye.
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Simon Watkins has positions in BAE Systems and Rolls-Royce Plc. The Motley Fool UK has recommended BAE Systems and Rolls-Royce Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
